By Darrell Martin
Have you ever been taken by surprise by the news, scheduled or otherwise? Traders need to be aware of the news at all times while trading. It is often recommended not to take a trade right before or during a news announcement. Markets can react strongly in unpredictable ways to the information that is released. Stops can be jumped when the market moves fast enough against the direction of a trade. With high volatility in the market, implied volatility can be traded in spreads, specifically US based exchange, CFTC regulated Nadex spreads.
Spreads have a floor and a ceiling price, which marks the bottom and top of the market’s range, that is traded for that spread. They can be traded long or short. The risk, as well as the profit is capped at the floor and ceiling. For example, if the market price goes against the direction the spread was traded and beyond the floor or ceiling, the trader can choose to stay in the trade. Risk will cap off at the floor or ceiling. The market may even reverse and come back in the direction of the trade and bring some profit. For these reasons, spreads can be very attractive for day traders.
For trading the news when there is implied volatility built into the prices of spreads, using creative strategies can make for high probability trades. Enter the Iron Condor. This strategy consists of two spreads, one stacked vertically on top of the other. The lower spread is bought with the ceiling where the market is trading at the time. The upper spread is sold with the floor where the market is trading at the time, thus meeting the ceiling of the bought spread. With a generous amount of implied volatility, it is possible to buy quite a bit lower than where the market is and to sell quite a bit higher than where the market is.
How could that setup provide a high probability trade? In the case of scheduled news, ones where the there is a consistent reactionary move in the market, and where the market makes a nice move and then pulls back to where it started from or close to it, the Iron Condor can be quite profitable.
Tuesday, March 21, at 8:30 AM ET, the US Current Account news will be released. This news is the difference in value between imported and exported goods and services, income flows and unilateral transfers. Traders watch this news because it is directly linked to currency demand. Based on the average move in response to this event, a nice move with a pullback, an Iron Condor with a combined profit potential of $35 presents a high probability trade.
What does that mean? It means each Nadex EUR/USD spread should have a profit potential of around $17 or more. The lower spread should be bought at a price around $17 lower than where the market price is and the upper spread should be sold at a price around $17 higher than the where the market is. With the right amount of implied volatility present in the market in anticipation to news reaction, there will be no problem finding qualifying spreads.
In the event that the market does the opposite of what is anticipated, based on previous market response over a 12-month or more period, then it is important to have stops. If the market should make a move and take off, not making the expected pull back, then stops need to be placed where the 1:1 risk reward ratio points would be. In this trade scenario, that is where the market hits 70 pips above and below from where the market was at entry.
Max profit happens when the market pulls back to center between the spreads by settlement. If the market settles anywhere in between the breakeven points, or 35 pips above and below from where the market was at entry, then the trade will make some profit based on how far from the center it was at exit or settlement.
For free day trading education, a complete calendar of news events for trading and free access to the spread scanner for ease in finding the right spreads for the trade, visit www.apexinvesting.com.